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Dealing with Wealth Inequality
“A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” — Milton Friedman
Wealth inequality is the crux of modern progressivism and democratic socialism. They contend that free-market capitalism moves wealth to the top — leaving the rest at a loss for cash — and that the government must intervene to redistribute wealth from the bloated top to the destitute bottom. This is for good reason: It lends itself to scary-looking graphics such as this:
Inequality is inherent to the capitalist system, but that doesn’t necessarily explain why it’s such a big topic for the Left. After all, most people expect wealth inequality, and think it a good trade off for better standards of living. The reason the Left uses wealth inequality is that the differences are enormous. When people see graphics like the one above, they are swayed into believing that the benefits aren’t worth the costs. If the rich are really that rich, what possible “unintended consequence” could outweigh the gains to be had in plundering them and distributing their fortunes?
The typical capitalist argument — that a smaller slice of a bigger pie is still more pie — is a good explanation, but still grates against people’s sense of justice when the numbers are this skewed. A further explanation is required.
How Should We Respond to Wealth Inequality?
It’s less a matter of there being a single, definitive answer, than a combination of them. The first thing to tackle is what these graphics leave out: primarily, social mobility. While skewed distributions can make it seem that all the wealth is in the hands of a few one-percenters, it neglects to show the shifting of whom those one-percenters are, and how people shift across the wealth distribution through time. For instance, a study by the University of Michigan — discussed here by the Dallas Fed — showed that 95 percent of households that were in the bottom quintile of income in 1975 had moved up by 1991. Over time, most people see an increase in their absolute wealth, and the bottom of the distribution is filled by young people and immigrants whose fortunates almost always improve with time. This mobility cannot be ignored.
In a free market, this makes sense. Most people start their economic lives poor and often take out loans, giving them a negative net worth. However, as people acquire assets over time, they move up the distribution. There are a few elites, but — by the nature of the free market — their success comes from providing benefits to others, so tearing them down to the “normal” level costs everyone else. Keep at that long enough, and there’s soon no one left to plunder.
This explains why the skew might be more than one would initially expect, but not why it would be what is often claimed. There is some credibility to the claim of increasing inequality, but the culprit here isn’t capitalism, but the march toward socialism.
This cuts to the core of the Left’s dogma. How can socialism — the darling of equality — cause inequality? Indeed, socialists are so enamored with equality, that they have essentially made it axiomatic that socialism creates equality. But why would this necessarily be so? Have they never bothered to put two trends together: i.e., a trend towards greater inequality in the last 40 years, and a concurrent trend towards socialism?
To understand why socialism has created inequality, you have to understand how workers gain more income. In a market economy, a worker’s income increases with the demand for his skills among potential employers biding for his labor. Eventually, the wage reaches an equilibrium where the highest offer isn’t in excess of the value he would add.
Socialism, however, gets in the way of this. Taxes, tariffs, and regulations all make business more difficult and reduce the number of companies who can stay afloat. With fewer potential employers competing for our worker’s labor, he’s more likely to get stuck with the first (and lowest) offer he receives. Multiply that across an economy, and you get inequality and mobility stagnation.
The irony is that socialists’ main argument against capitalism — that free markets allow powerful monopolies and oligopolies to form — applies at least as powerfully to their own preferred solution. That is, as regulations and government interference increase, the only companies able to survive are those with the size, political influence, and legal budget to get by. And so we end up with a few one-percent companies courtesy of socialism, and significantly less competition in the labor market.
In short, the increasing extremes of wealth inequality can be correlated to the socialism in our system. In contrast, the moderately strong inequality of the typical free market reflects social mobility, which is a reasonable trade-off given the increase in absolute wealth it creates.
So will electing Sen. Bernie Sanders result in an explosion of wealth inequality? Probably not. If the government chooses to go after wealth inequality directly, they will find a way of strangling even the wealthiest, best-connected companies, which would damage production.
The lesson to be learned is that wealth inequality is a by-product of the mix of socialism with capitalism. There is enough socialism to destroy competition, but enough capitalism for there to be wealth left to accumulate. Furthermore, wealth inequality — despite the ramblings of Senator Sanders — is not our biggest issue and is not causing chronic problems. Rather, it is a symptom of the many complications that result from a mixed-economy.
Published in General
I have no idea why this doesn’t seep into political discourse. Something like, jobs should bid for workers not workers bid for jobs. Well, something more pithy, but you get the drift. There should be a simple formulation that provides a vocabulary for voters to understand and defend a growth position.
Well… I’m convinced that the crux of modern Progressivism is state control, and that Wealth Inequality, or Income Inequality, or whatever, is the readily available excuse du jour.
I can’t read that graphic; can you replace it with a higher resolution version or provide a source?
Thomas Sowell, God bless him, beats this drum incessantly. What does he get for his effort? Characterized as a crank in the MSM, and largely ignored by everybody else. (Present company excepted, of course.)
I think the problem is that most Americans rely on an intuitive, rather than analytical understanding of economics in their personal and political lives. This includes many who carefully consider economics in their professional endeavors. Need evidence? Consider all the people you’ve met that are perfectly capable of arithmetic until the numbers have dollar signs in front of them.
Why this is, I can’t say, but I have no doubt it’s real. We need more people to think about economics rather than feel economics for rational arguments to work. I know that doesn’t answer the offered question, but it may suggest a more productive line of inquiry.
BTW, this isn’t a left/right thing. I have no doubt that Paul Krugman thinks about economics, even when drawing the wrong conclusions. I’ve also seen thoughtless conservative comments to suggestions by James Pethokoukis on this site. While I think the facts of economics trend conservative, conservative economics doesn’t imply thoughtfulness.
The article assumes that progressive leaders actually believe what they say and they really do seek income equality. Don’t believe it for a minute. It’s all PR. The administrative welfare mixed capitalist system the progressives seek serves the interests of established wealth, people and organized interests with access, CEOs of big companies, especially banks, and the super wealthy. It is not an accident that Buffet, Gates, Soros, et al, professional management of most giant corporations all support the administrative state, regulations, complexity. Big complex, opaque government, impossibly complex tax and regulatory codes serve the interests of people with access and economies of scale. Nobody pushes socialism anymore, even Bernie, supports the administrative state he just wants it more intrusive and oppressive. He probably doesn’t even understand the progressive game because he is a complete fool, but most Democrats and members of the Republican establishment understand perfectly well.
Raise interest rates.
Low interest rates bias the capital labor mix to capital.
Low interest rates pervert asset valuation, especially financial instruments (its baked into the math). Raise the interest rate up to historic norms (5% or so), and the “wealth” will be revalued and inequality will be reduced by ending what is essentially rich-people-welfare.
There is no such thing as a fact of economics.
Greediest man in the world.
Wants to take a trillion dollars he didn’t earn from other people to spend as he sees fit.
How about because it never gets distributed from the first quintile to the fifth, but rather from the part of the first quintile that produces stuff to the part of the first quintile that lives in the suburbs of DC?
Just get people to focus on the other message of the chart, namely that some folks are a lot more beneficial to society than others. Wealth is just how we measure someone’s economic contribution/benefit to society.
You want more wealth, be of greater benefit to society.
Dangerous. It’s too easy to point at a Bernie Madoff or an Enron (or an Al Gore, for that matter) as “proof” that wealth is no measure of social benefit.
Not sure. Enron and Bernie Madoff are kaput, exposed as frauds, and no longer on the right hand side but the left. True, the Left has to be educated that the vast majority of wealth is non-fraudulent, and that chore of education, unfortunately, needs to be performed, but doing that is all it should take.
Al Gore is wealthy because he provides great benefit to the Democrats – hence he “earned” his wealth.
I believe you might have to say, this man speaks for a lot of other people & would receive the votes of nearly an electoral majority. His opinions about your taxation system are not different to your president’s, who has secured electoral majorities twice. Perhaps it is the political majority–or a coalition near to it–that is the greediest man in the world.
Of course, that’s just America: I suppose no one is under any doubt that if the rest of the world voted, Dems would install a permanent tyranny. The vast, overwhelming, nearly incomprehensible majority of the people in this world, would they not vote to confiscate at the slightest provocation, at the first occasion?
This is an excellent comeback to the socialist impulse.
Majority rule is two kids stealing a third kid’s lunch money.
I agree both with your point, Mr. Tillman, about the deception of motives of the leftist politicians (perhaps even the Republicans) and also must say Naudious, the graphics are illegible.
I always liked the formulation, “Majority rule is two wolves and a sheep deciding what’s for lunch.”
Majority rule is also how you get two kids to fight for a third kid’s life. Minority rule is two kids stealing every other kid’s lunch money. Why in hell are we talking in these slogans?
The trick that is seldom identified in these sorts of graphs, and gets lost in successive repeating, is that the Left does not say “owns” wealth to produce massive inequality graphs, they say “owns or controls”. And the manager of Fidelity Magellan mutual fund is given “control” over the assets of the fund, even though it is actually owned by people like you and me. In that way, the total amount of “wealth” in existence is replicated far beyond the actual total in existence. The real numbers are a lot harder to come by, but- unequal, yes- also a lot less “impressive”.
I don’t think this is accurate. Wealth is your ability to capture the value you add.
People aren’t very good at that. Most captured value is 0 by the person who actually creates the value. The real money goes to people who figure out how to monetize a widget, not the people who actually design and create the widgets.
I think mine is more relateable to a modern progressive audience. Too many of them think wolves should be a protected species. It’s natural for wolves to eat sheep, and anything that is natural is good.
By contrast, my formulation taps into the crusade against bullying.
There are alternatives to the two you came up with. Majorities abuse Minorities, and that needs restating again and again.
Yabbut, an unsold widget has zero value. It’s disingenuous to say that the one that monetizes the widget does not create value.
Disagree. If someone figures out how to make money using other folks created value, then there is no reason that the originators of the value couldn’t follow suit. That they don’t, according to your assumption, means that it takes additional skill/acumen/drive/ambition/market perception etc. to close the deal and the brokers who are able to do so provide great value and thereby profit.
While many Democrats emphasize income inequality, I think most Americans worry more about economic security. The problem is that free market arguments are directly opposed to economic security – Schumpeter’s creative destruction and all that. The smart liberals (FDR, JFK, Bill Clinton, even Nancy Pelosi) grasp this well and couch their policy arguments not as making everyone more equal, but as providing a strong security net.
The most important thing to remember about the Health Insurance debate is that it is about economic security not health.
The problem with the Conservative (pre-New Deal) approach to economic security – robust economy with security provided by strong familial and social networks is that these family and social networks have been completely undermined by government safety nets.
The thesis of Kevin Williamson’s “The End is Near and It’s Going to be Awesome” is that the coming bankruptcy of governments will encourage the revival of these older forms of social safety nets.
Unfortunately, trying to sell a sovereign debt crisis as a solution to economic security is tough.
I would modify that. Profits generally accrue to those that take on risk. An entrepreneur gets rich by risking his livelihood in an attempt to compete in the market. The inventor that develops the widget in his hobby shop, while he has a day job takes on very little risk. Prices have very little to do value, and more to do with scarcity. Wages have little to do with the value one adds and more to do with how much of a hassle it would be to replace you.
If there are only three kids in this scenario, who are they fighting?
That’s why teachers police the schoolyard.
Simplified analogies to illuminate larger principles are as old as humanity.
I don’t say that monetization strategy isn’t valuable. I say that monetization strategy is over valued, and too much of the money goes to them, rather than people creating things.
And of course unsold inventory has value. Unless perhaps you’d be willing to let me dispose of your unsold inventory for a small fee, of course. Just remember this huge favor.
Another thought about that graph: It places at the very bottom not those who live in poverty but rather those who are carrying large amounts of debt.
This is like claiming one is poorer than a homeless person because, hey, at least the homeless guy isn’t paying more on his mortgage than what the house is worth.
Presumably, they used that debt to pay for things which those in poverty cannot afford, and they would not have been able to accrue that debt without some sort of collateral which those in poverty have not.